THOMAS AND CHERYL KOZIOL, INC v. LASALLE NATIONAL BANK

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0

THOMAS AND CHERYL KOZIOL, INC.,

Plaintiff-Appellant,

v.

LASALLE NATIONAL BANK (as Trustee),

GMAC COMMERCIAL MORTGAGE CORP., ORIX

CAPITAL MARKET, LLC, individually and as

successor in interest to BANK ONE

MORTGAGE CAPITAL MARKETS, LLC, and to

CRIIMI MAE SERVICES LIMITED PARTNERSHIP,

CRIIMI MAE SERVICES LIMITED PARTNERSHIP,

Defendants-Respondents,

and

KILLIAN & SALISBURY, P.C., LARIDIAN

MANAGEMENT, INC., THOMAS MESCE, CNA

SURETY, and WESTERN SURETY COMPANY,

Defendants.

________________________________________________

April 28, 2014

Argued March 17, 2014 - Decided

Before Judges Kennedy and Guadagno.

On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-6429-05.

Dennis G. Harraka argued the cause for appellant (Ferrara, Turitz, Harraka, Goldberg, P.C., attorneys; Mr. Harraka, on the brief).

Ryan Milun argued the cause for respondents (The Killian Firm, P.C., attorneys; Mr. Milun, on the brief).

PER CURIAM

Plaintiff, Thomas & Cheryl Koziol, Inc. (Koziol), appeals from two orders entered by the Law Division on August 28, 2012. The first order granted defendants' motion for summary judgment and dismissed the three remaining counts of plaintiff's complaint. The second order denied plaintiff's motion for leave to file an amended complaint and other relief. For the reasons that follow, we affirm both orders.

I.

This is the third time the parties have been before us. Our 2010 decision provides factual background:

This case has its origins in a 1998 complaint filed by LaSalle National Bank to foreclose a mortgage on an apartment building owned by Thomas & Cheryl Koziol, Inc. (Koziol). . . . [T]he foreclosure was hotly contested as to both the issue of whether the mortgage was in default, and as to the amount due. In September 1999, while the litigation was pending, Hurricane Floyd struck New Jersey, causing flooding that damaged the apartment building. There is no dispute that Koziol had allowed the insurance on the building to lapse, and as a result LaSalle had "force placed" insurance on the building. It turned out that the force placed insurance did not cover flood damage. However, LaSalle was able to recover a little over $128,000 from an errors and omissions (E&O) policy procured by GMAC, one of the mortgage servicers.

[Thomas & Cheryl Koziol, Inc. v. LaSalle National Bank, No. A-3818-07 (App. Div. Mar. 29, 2010) (slip op. at 3) (footnote omitted).]

Koziol sought reimbursement from the E&O proceeds for repairs it had made to the property, but LaSalle refused. Id. at 3-4. The trial court rejected Koziol's claims and entered a final judgment of foreclosure in 2001. Id. at 4.

Koziol appealed and we affirmed the foreclosure orders and the order denying reconsideration. LaSalle Nat'l Bank v. Thomas & Cheryl Koziol, Inc., No. A-2849-01 (App. Div. Apr. 6, 2004), certif. denied, 185 N.J. 30 (2005).

In 2005, Koziol filed another complaint alleging that defendants had mismanaged Koziol's property from the time the foreclosure action had been filed by LaSalle in 1998, until plaintiff redeemed the property in 2002. It asserted claims of unjust enrichment, breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty and waste, negligence, negligent supervision, tortious interference, and RICO claims.

Koziol claimed that when LaSalle obtained the forced placed insurance it undertook a duty to Koziol to obtain appropriate insurance, including flood insurance. Id. at 4-5. Koziol claimed that due to the lack of flood insurance, it was never reimbursed for over $200,000 worth of repairs to the building and it also lost considerable rental income. Id. at 5. The Law Division judge dismissed those claims, finding they were barred by res judicata and collateral estoppel, because they either were raised or could have been raised in the litigation over the amount due on the foreclosure judgment and in the 2004 appeal. Ibid.

Koziol appealed, challenging the dismissal of counts three, four, and five of its complaint, which allege breach of contract with respect to LaSalle's forced placement of insurance, third-party beneficiary insurance claims, and negligence. Id. at 6-7.

We reversed the summary judgment in favor of LaSalle and its servicers on counts three, four, and five, but affirmed dismissal of the complaint against the receiver defendants and the sureties. Id. at 2. We concluded that the negligence and accompanying damage claims were not barred by collateral estoppel or the entire controversy doctrine, and reversed the order dismissing those portions of the complaint and remanded those claims to the trial court. Id. at 11. The issue to be determined on remand was "whether LaSalle owed Koziol a duty (by contract or on an equitable theory) to procure valid flood insurance if it was going to force place insurance on the premises." Id. at 7.

Defendants moved for summary judgment on counts three, four, and five, the only remaining counts of the complaint. Koziol moved for leave to amend its complaint to add additional claims of tortious interference against GMAC, Criimi Mae, and Orix, and to clarify that its request for punitive damages asserted in count six was meant to apply to all of the previous counts except the negligence claims.

In a comprehensive oral decision, the court granted defendants' summary judgment motion, dismissing Koziol's remaining claims, and denied Koziol's motions.

II.

Koziol argues that the trial court's decision should be reversed because it misapplied the summary judgment standard when it accepted as true numerous representations in defendants' statement of undisputed material facts and elsewhere that were based solely on the assertions of defendants' attorney, but that had no basis in the record or were otherwise contradicted by the evidence. We disagree.

Summary judgment should be granted to the moving party when "there is no genuine issue as to any material fact challenged and that the moving party is entitled to judgment or order as a matter of law." R. 4:46-2(c). The trial court's decision must be predicated on the competent evidential materials, viewed in the light most favorable to the non-moving party, which is accorded all legitimate favorable inferences to be derived from that evidence. R. 4:46-2(c); Nicholas v. Mynster, 213 N.J. 463, 478 (2013); Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 523 (1995); Marrone v. Greer & Polman Const., Inc., 405 N.J. Super. 288, 293 (App. Div. 2009); DiIorio v. Structural Stone & Brick Co., 368 N.J. Super. 134, 137 (App. Div. 2004); see also Judson v. Peoples Bank & Trust Co. of Westfield, 17 N.J. 67, 75 (1954) ("All inferences of doubt are drawn against the movant in favor of the opponent of the motion.").

The critical facts relied on by the motion court are undisputed. In August 1998, Koziol allowed the property insurance on the mortgaged premises to lapse due to nonpayment. In October 1998, defendant, Criimi Mae Services, the special servicer for the loan, force placed property insurance under defendant GMAC's master policy. Notice of the force placed insurance was provided to Koziol's former counsel. Koziol does not dispute that it had knowledge of the force placed insurance as early as November 1998, several months before the property suffered damage. Indeed, Koziol attempted to replace the forced placed insurance in February 1999, but the policy Koziol sought to substitute for the forced placed policy was not acceptable to the lenders. When the lenders sent Koziol a letter detailing a list of deficiencies, Thomas Koziol testified that he considered the demands "to be over the top" and eventually he "gave up trying to cancel [the forced placed] policy."

The mortgage required Koziol to secure insurance coverage. That obligation was breached when Koziol failed to make the required payments and allowed the coverage to lapse. The motion court's finding that "Koziol had an entire year to correct the insurance issue and get replacement insurance coverage [and] failed to do so" is amply supported by the record.

Koziol next argues that the court misinterpreted the mortgage documents and the servicing agreements and, in doing so, failed to reach the "common sense" conclusion that the parties intended that the documents contained the "implied" terms that Koziol would be notified before insurance was force placed and that the force placed insurance would provide at least the same coverage required of Koziol.

Koziol also argues that the court's dismissal of its claim in count three for breach of the implied covenant of good faith and fair dealing was erroneous because the issue of bad faith is a question for the jury, and because there was ample evidence in the record for a jury to find that defendants acted in bad faith. Koziol points to defendants' retention of the insurance proceeds to pay attorney fees as evidence of bad faith. The trial court in the foreclosure proceedings correctly determined that the proceeds from GMAC's E&O policy belonged to GMAC to use as it wished.

Koziol's breach of contract claim is premised on the assumption that the mortgage required the servicer to procure insurance equal to that required of the borrower. The motion court framed the issue as "whether LaSalle owed a duty, by cont[ract] or on a[n] equitable theory to procure valid flood insurance if it was going to force place insurance on the premises[.]"

The motion court found that defendants' procurement of the incorrect insurance was a mistake, rather than deliberate malicious conduct. Koziol does not dispute that defendants' failure to include flood coverage in the force placed insurance was unintentional and not done maliciously. However, Koziol claims that defendants acted in bad faith when they force placed the insurance with no prior notification or opportunity for Koziol to restore its own insurance and, in addition, when they refused to accept the much less expensive insurance that plaintiff had procured and that contained the appropriate flood coverage.

While "every contract in New Jersey contains an implied covenant of good faith and fair dealing[,]" Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 420 (1997), the principles cannot serve to alter or override a contract's express terms. Wilson v. Amerada Hess Corp., 168 N.J. 236, 244 (2001).

The language of the mortgage is clear: in the event that the lender is required to purchase insurance as the result of the borrower's failure to do so, the insurance is purchased to protect the lender's interest, not the interest of the borrower:

If Borrower fails to perform the covenants and agreements contained in this Instrument . . . then Lender at Lender's option may make such appearances, disburse such sums and take such action as Lender deems necessary, in its sole discretion, to protect Lender's interest, including but not limited to . . . procurement of satisfactory insurance as provided in paragraph 5 hereof.

The mortgage contains no provision that would suggest an obligation on the part of the lender or the servicer to procure insurance to protect Koziol's interests.

Koziol relies on our decision in Cromartie, supra, 277 N.J. Super. 88, in support of its breach of contract claim. The motion judge found Cromartie inapplicable and we agree. In Cromartie, the plaintiffs' property burned down and they sued Carteret, the bank that acted as the servicing agent for the mortgagee bank. Id. at 91-93. Carteret had failed to make payments for insurance even though it was escrowing the payments received from the borrower. Ibid. The jury found that Carteret had committed equitable fraud and had "breached its contractual obligation when it permitted the fire insurance on the Cromarties' property to lapse without notifying them." Id. at 96.

We remanded for a new trial solely on the issue of damages which had included a claim for lost rents on the property. We found the lost rent award unsustainable since "the Cromarties did not prove their expenses in operating the property and therefore did not prove their lost profits." Id. at 103.

This case is distinguishable from Cromartie as Koziol, not the lender LaSalle, was responsible for paying the insurance premiums and Koziol's failure to make those payments resulted in the lapse of coverage. Unlike the lender in Cromartie, LaSalle had no obligation under the terms of the mortgage to insure the property.

Koziol also challenges the dismissal of its claim in count four that it was a third-party beneficiary of the servicing agreement between GMAC and LaSalle. Third-party beneficiaries have standing to enforce contract provisions made for their benefit. Flanigan v. Munson, 175 N.J. 597, 606-07 (2003); Strulowitz v. Provident Life & Cas. Ins. Co., 357 N.J. Super. 454, 459-60 (App. Div.), certif. denied, 177 N.J. 220 (2003). A party who happens to derive an incidental benefit from a contract's performance has no cause of action, however. Rieder Com. Inc. v. Twp. of N. Brunswick, 227 N.J. Super. 214, 222 (App. Div.), certif. denied, 113 N.J. 638 (1988). The distinction between third-party and incidental beneficiaries turns on the intent of the parties to the contract:

The essence of contract liability to a third party is that the contract be made for the benefit of said third party within the intent and contemplation of the contracting parties. Unless such a conclusion can be derived from the contract or surrounding facts, a third party has no right of action under that contract despite the fact that he may derive an incidental benefit from its performance.

[Ibid. (quoting Gold Mills, Inc. v. Orbit Processing Corp., 121 N.J. Super. 370, 373 (Law Div. 1972)).]

The test for whether a person qualifies as a third-party beneficiary is whether the parties to the contract intended that it afford a third party the right to performance under the contract that might be enforced in the courts. Broadway Maint. Corp. v. Rutgers, The State Univ., 90 N.J. 253, 259 (1982); Werrmann v. Aratusa, Ltd., 266 N.J. Super. 471, 476 (App. Div. 1993).

The servicing agreement here could not be clearer. It expressly denied to any third party any benefits or rights to enforce the agreement. The fact that Koziol might benefit incidentally from some of the provisions in the service agreement afforded it no standing to enforce the terms of the agreement. We are satisfied that the motion court correctly held that count four should be dismissed because Koziol had no standing to enforce the terms of the servicing agreement because, as a matter of law, it was not a third-party beneficiary of that agreement.

Koziol argues that the court's decision to grant summary judgment to defendants on its negligence claim was erroneous because: 1) the lender was a mortgagee in possession with the duty to preserve the property; 2) defendants also had a duty of care under Section 323 of the Second Restatement of Torts; and 3) no "loan servicer" expert was required to establish the lack of due care.

Count five of Koziol's complaint alleged, in relevant part:

148. Once LaSalle, GMAC, and Orix, assumed the responsibility to maintain such insurance, each owed to Koziol a duty of due care with respect to the continuing obligation to maintain such insurance.

149. Their failure to do so was negligent, and unreasonable as a fiduciary.

To establish a cause of action for negligence, a plaintiff must prove that the defendant had a duty of care toward the plaintiff, that the defendant breached that duty, and that the defendant's breach was the actual and proximate cause of damages to the plaintiff. Jersey Cent. Power & Light Co. v. Melcar Util. Co., 212 N.J. 576, 594 (2013). The motion court found that none of the defendants owed Koziol a duty of care that was independent of the contract.

Koziol argues that Section 323 of the Restatement of Torts separately imposed a duty of care on defendants. We disagree. Under that provision of the Restatement:

One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of the other's person or things, is subject to liability to the other for physical harm resulting from his failure to exercise reasonable care to perform his undertaking, if

(a) his failure to exercise such care increases the risk of such harm, or

(b) the harm is suffered because of the other's reliance upon the undertaking.

[Restatement (Second) of Torts 323 (1965).]

The predicate for liability here is that there was a "breach of a promise which has induced reliance and so caused harm[.]" Restatement (Second) of Torts 323, comment d (1965). Reliance is a "key element" to establish a claim for tortious liability under this provision. Coyle v. Englander's, 199 N.J. Super. 212, 226 (App. Div. 1985).

Koziol argues that the duty arose because defendants had a common interest with Koziol in securing the correct flood insurance, federal flood insurance could only be written in the name of the borrower, and because it was a third party that could foreseeably be injured by the failure of the contracting party to render due care.

Koziol was not named as a loss-payee on the insurance contract and, furthermore, both of the experts who testified agreed the insurance was placed to protect the lender's interests, not Koziol's. The mere ability to foresee that a third party may be injured is insufficient, without more, to establish the existence of a duty to that party under the Restatement. Carter Lincoln-Mercury, Inc., Leasing Div. v. Emar Group, Inc., 135 N.J. 182, 194 (1994). Koziol has failed to establish that defendants had a duty to it under Section 323 of the Restatement.

We find Koziol's remaining arguments to lack sufficient merit to warrant additional discussion. R. 2:11-3(e)(1)(E).

Affirmed.